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Introduction

FCA: Quarterly Consultation No. 10

On September 4, 2015 the Financial Conduct Authority (FCA) published its tenth quarterly consultation paper. Chapter 8 of the consultation paper sets out several proposals for amendments to the Listing Rules (LR), Prospectus Rules (PR) and Disclosure and Transparency Rules (DTR), including the following:

Cancellation provisions in the Listing Rules

The FCA previously set out a package of measures in CP 12/25 and CP 13/15 designed to strengthen minority shareholder rights and protections where they are at risk of being abused. In developing the final package, the FCA determined that the question of cancellation of a listing where a controlling shareholder is present raised important concerns about appropriate levels of investor protection within the premium listing segment of the market.

The enhanced protection that was introduced, following consultation, is the requirement for a majority of votes of independent shareholders to support an application for cancellation in cases where the company has a controlling shareholder (LR 5.2.5R(2)(b)). This is in addition to LR 5.2.5R(2)(a) which requires the support of 75% of votes cast in the general meeting.

LR 5.2.11AR contains the key provisions relevant to companies where the offeror is interested in more than 50% of the voting rights before announcing its firm intention to make an offer. In this situation, if the proportion of voting share capital held by the controlling shareholder post the offer exceeds 80%, the requirement in LR 5.2.11AR(3) for acceptances to have been received from independent shareholders which represent a majority of voting rights held by independent shareholders is disapplied under LR 5.2.11DR.

However, since the FCA introduced the disapplication, it has come to light that in some specific situations there could be a different outcome under the two routes, with potentially significant consequential and unintended implications for investor protection. In normal circumstances, where a minimum free float of 25% is required for listing, a controlling shareholder would not be able to hold more than 75% of the share capital. If the controlling shareholder of a 75% controlled company subsequently made an offer for the remaining shares they would still need to clear the material hurdle of acquiring, in this case, a further 5% of the voting share capital by way of the offer. However, if a company were, at the outset, permitted exceptionally to list with an 80% controlling shareholder and a 20% free float this would mean that a takeover offer could be made later on terms that garnered no acceptances but where the controlling shareholder could then procure a delisting. There would then be no indication arising from decisions made by some shareholders to accept the offer, of whether the terms provide fair compensation for those independent shareholders who would not wish, or be able, to hold the shares once unlisted.

The FCA has considered the following broad approaches for resolving this problem:

introduce new guidance on decisions to extend waivers on allowable free float on admission and on an ongoing basis or further rules for applicants with controlling shareholders;

limit the scope of action of the controlling shareholder by expanding the list of mandatory independence provisions included in the agreement between a company and its controlling shareholder(s) in LR 6.1.4DR;

maintain the current rules but seek to exercise discretion on an application to cancel the listing on a case-by-case basis; or

delete the 80% control provision contained in LR 5.2.11DR.

The FCA proposes to follow the approach of deleting the 80% control provision contained in LR 5.2.11DR. The FCA wishes to emphasise that this should not be seen to imply a more general tolerance of low free floats and that it will still retain the ability, on a case-by-case basis, to initiate delisting where the remaining free float proves too small to support adequate liquidity.

Changes to requirements on audit committees

The Statutory Audit Directive (2006/43/EC) (SAD) was adopted in 2006. The SAD sets out various requirements relating to the statutory audit of annual accounts and consolidated accounts and its requirements relating to audit committees were implemented in the UK through corporate governance rules included in the DTR sourcebook. The SAD was amended in May 2014, when the Statutory Audit Amending Directive (2014/56/EU) (SAAD) and Regulation (EU) No. 537/2014 (the Regulation) were adopted.

The Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) consulted on the implementation of the SAAD in December. Following those consultations, BIS requested that the FCA amend the existing rules in DTR 7 on audit committees to reflect the revised provisions contained in the SAAD in relation to public interest entities (PIE) with transferable securities admitted to trading on a regulated market.

The FCA proposes to amend DTR 7.1.1R and introduce a new rule, DTR 7.1.1AR. The effect of this would be to:

extend the independence requirement in relation to the composition of the audit committee from at least one member to a majority of the members and include this requirement in new DTR 7.1.1AR;

include in new DTR 7.1.1AR the requirement that at least one member of the audit committee must have competence in accounting and/or auditing (previously this requirement was contained in DTR 7.1.1R); and

require the members of the audit committee as a whole to have competence relevant to the sector in which the issuer is operating.

The FCA proposes to insert a new rule, DTR 7.1.2AR, to require that the chairman of the audit committee is independent and must be appointed by the members of the audit committee or by the administrative or supervisory body of the issuer.

The FCA also proposes to amend DTR 7.1.3R, which sets out the responsibilities of the audit committee, to reflect the amended scope of responsibilities, as set out in the SAAD.

The FCA anticipates that its proposed new rules will come into effect in June 2016 for financial reporting periods beginning on or after June 17, 2016. To assist issuers to prepare to meet the new requirements, the FCA proposes that the changes to DTR 1B and DTR 7.1 apply to financial years starting after the date of application of the new EU regulatory framework, i.e. for financial years beginning on or after June 17, 2016. This means that issuers with a financial year starting on or after June 17, 2016 will be subject to the new DTR requirements, whereas issuers with financial years beginning before June 17, 2016 will be subject to the existing DTRs until the end of that financial year.

The FRC is consulting on making some small amendments to the PR sourcebook in line with the draft regulatory technical standards (RTS) on the Prospectus Directive arising from the Omnibus II Directive, which were published by ESMA on June 25, 2015.

The draft RTS are potentially subject to change and have not yet been adopted by the European Commission. It is possible that the RTS may take effect as early as autumn 2015. Therefore, the FRC is currently consulting on the basis of the draft RTS, so that it may be in a position to amend the PR, to ensure that they are compatible with the RTS provisions, at the time the RTS take effect. Should any changes be made to the draft RTS, the FRC will consider what impact this may have on its proposals.

The FCA requests comments by October 5, 2015 in relation to the proposed changes to the PR and by November 5, 2015 in relation to the proposed changes to the LR and DTR.

On September 7, 2015 the Home Office published draft regulations that have been submitted to Parliament for approval under the Modern Slavery Act 2015 (the Act). The draft regulations prescribe that commercial organisations with a total turnover of at least £36m will be required to publish a slavery and human trafficking statement every financial year under section 54 of the Act. They also set out how the total turnover of a commercial organisation is to be calculated.

The regulations set out that a commercial organisation’s total turnover is the turnover of that organisation and the turnover of any of its subsidiary undertakings. The definition of subsidiary undertakings reflects that already used in section 1162 Companies Act 2006. Turnover means the amount derived from the provision of goods and services, deducting any trade discounts, value added tax and any other taxes based on the amounts so derived.

The Home Office will publish guidance in relation to the duties imposed on commercial organisations under section 54 of the 2015 Act ahead of those duties coming into force.

The Investment Association: Creation of the Executive Remuneration Working Group

On September 8, 2015 the Investment Association published a press release announcing the creation of a working group, the Executive Remuneration Working Group, to bring forward proposals for a radical simplification of executive pay.

The Investment Association notes that concern has been mounting in the investment industry, on company boards and among executives themselves that pay structures are becoming too complex, leading to a lack of clear incentives for company management to act in the best long term interests of the companies themselves and their investors. The Executive Remuneration Working Group brings together senior representatives from the investment community and the corporate world to address the issue.

The Executive Remuneration Working Group is expected to bring forward proposals in the spring of 2016.

G20/OECD: Revised principles of corporate governance

On September 7, 2015 the G20/OECD published a new set of corporate governance principles (Principles). The Principles, last revised in 2004, maintain many of the recommendations from earlier versions as continuing essential components of an effective corporate governance framework. They also introduce some new issues and bring greater emphasis or additional clarity to others. While some of the Principles may be more appropriate for larger than for smaller companies, it is suggested that policymakers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies.

The Principles provide guidance through recommendations and annotations in six chapters:

Ensuring the basis for an effective corporate governance framework: This chapter focuses on the quality and consistency of the different elements of regulations that influence corporate governance practices and the division of responsibilities between authorities. In particular, new emphasis is placed on the quality of supervision and enforcement.

The rights and equitable treatment of shareholders and key ownership functions: This chapter identifies basic shareholder rights, including the right to information and participation through shareholder meetings in key company decisions.

Institutional investors, stock markets and other intermediaries: This is a new chapter which addresses the need for sound economic incentives throughout the investment chain, with a particular focus on institutional investors acting in a fiduciary capacity.

The role of stakeholders in corporate governance: The Principles encourage active co-operation between corporations and stakeholders and underline the importance of recognising the rights of stakeholders established by law or through mutual agreements.

Disclosure and transparency: This chapter identifies key areas of disclosure. New issues in this chapter include the recognition of recent trends with respect to items of non-financial information that companies on a voluntary basis may include.

The responsibilities of the board: This chapter provides guidance with respect to key functions of the board of directors. New issues in this chapter include the role of the board of directors in risk management, tax planning and internal audit. There is also a new principle recommending board training and evaluation and a recommendation on considering the establishment of specialised board committees in areas such as remuneration, audit and risk management.

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